Releasing deposits when a dispute exists

It is familiar territory.

A transaction based on a properly executed Agreement of Sale fails to settle. For any number of good or bad reasons, the parties do not agree on the distribution of the buyer’s deposit funds that are held in escrow. What to do?

When an escrow dispute exists, the resolution will come in one of several ways. The parties may ultimately reach an agreement, whether on their own accord or facilitated by mediation that is required by the Agreement of Sale. A successful mediation will result in a release that states where the deposit is to be paid.

If the parties are unable to resolve their difference amicably, entitlement to the deposit may be established by a court of competent jurisdiction. If the deposit is less than $12,000, a magisterial district justice may hear the case, or disputes of any amount may be filed in the court of common pleas.

But what is a broker to do with deposits in disputes that are not amicably resolved or resolved via litigation? Until about eight years ago, the broker could do nothing and for that reason, brokers held disputed deposit monies for so long that the disputants were dead, untraceable or long forgotten. Fortunately, PAR successfully lobbied a change to RELRA that provided a path to the distribution of disputed deposit funds.  For the first time, a broker could release deposit funds to a party or parties, even though the parties had not come to an agreement and where no final order of court had issued.  The provisions found at Section 608.5(a)(2)(ii) allow a broker to disburse disputed deposits where there exists “a prior agreement in writing or electronic form as to disposition of the deposit or other escrows in the event of a dispute regarding entitlement to the deposit or other escrows.”

A “prior agreement” means an agreement executed by the buyer and seller before any dispute arises having to do with the deposit money. For all practicable purposes, the best time to pre-agree is at the signing of the Agreement of Sale when everyone is in love, or at least happy enough, to sign an agreement.

The pre-agreement contemplated by this section of RELRA is left to the imagination. Fortunately, PAR’s Standard Forms Committee has a good imagination and drafted a boilerplate pre-agreement for you. It appears in PAR’s Standard ASR at Paragraph 26(C) and is the one you are (hopefully) familiar with.

In short, this provision says that if the parties don’t reach some other agreement over distribution the deposit will be returned to the buyer, but it requires a lapse of time before any disbursement can be made. The standard agreement provides, as a trigger date, the passage of 180 days from the settlement date stated in the agreement (as amended by written extensions) or from the termination of the agreement, whichever is earlier. But some buyers will want to shorten this time to trigger the release in a shorter time – perhaps 90, 60, or even 30 days. Is that legal? Yes; RELRA doesn’t dictate what’s in that prior agreement. But is it wise? Perhaps not.  Even though disbursement under this provision of the Agreement of Sale does not resolve the dispute and allows one party to sue the other after disbursement of the deposit, a quick disbursement to the buyer can disadvantage a seller and lead to a rift between the listing agent and seller.  In order to preclude the deposit from being disbursed after the stated time, seller has to initiate mediation or suit in a manner that is verifiable (copy of the request for mediation or the papers that are initiate the suit).  Thirty days hardly provides the seller with a comfortable space within which to initiate mediation or litigation, especially since much of that time may be lost in endeavoring to negotiate a resolution short of mediation or litigation

Once the stated time passes and the buyer submits a written request for the deposit monies, what options does the broker who is holding the escrow have?  Can the broker, usually the listing broker, notify the seller and suggest that in order to prevent payment of the deposit to buyer that seller should initiate mediation/litigation?  Must the broker wait 30 days following receipt of buyer’s written request to disburse the deposit or may the broker disburse it immediately upon receipt of buyer’s request?

How long the broker holds the money following receipt of buyer’s written request for distribution is easily answered. Our agreement provides that after receipt of buyer’s request, broker will, within 30 days of receipt, distribute the money to the buyer unless the broker receives notice of litigation. Based on this language, the broker would not be liable for disbursing the money in less than 30 days from receipt of buyer’s written request.  The broker can wait until near the end of that period before shipping it out to the buyer, or can do so earlier. Keep in mind that the disbursement of the deposit made under this provision of the Agreement of Sale does not ultimately resolve the question of who is legally entitled to the deposit. Even after disbursement, buyer and seller have the right to sue the other.  For this reason, there is nothing wrong with the listing broker notifying seller of broker’s receipt of the 30-day notice from buyer and suggesting that the seller, in order to keep the funds in escrow, must initiate suit or mediation. While it may be a helping hand to the seller, again, it doesn’t ultimately resolve the question of entitlement and no harm is done.

A good practice for the broker is holding the deposit to contact the seller (or seller’s agent if the escrowing broker is a buyer agent) to determine whether mediation or litigation has been initiated.  If so, the broker should seek written verification.

To date, I am not aware of a single occasion where a seller sued the escrow holding broker for disbursing funds to a buyer under PAR’s provision, and I don’t expect to. Why would a seller sue the listing broker for making a disbursement pursuant to the provisions of an agreement when the seller has, as an available defendant, the buyer who has received a deposit that, pursuant to the agreement and the facts of the case, is rightfully seller’s?

Handling disputed deposits is not terribly complicated. It does, however, require knowledge of RELRA and your Agreement of Sale.  If you are still confused, there is always the hotline.